The financial services continues to suffer from what might politely be termed a trust deficit. Not only did people lose their savings and investments, but the industry paid itself extremely well while helping them do so - but even when confronted with evidence of malfeasance, has not only denied responsibility but fought viciously to halt any change to the conditions or practices that created the problem.
The result, despite somewhat tougher new regulations, has been a decline in the number of investors, the takeover of some exchanges and government lawsuits against the ratings agencies that were supposed to have evaluated investable securities.
So when technology and finance come together to offer computerized investment advice in competition with the human variety more than a few people have begun to ask themselves how this could be any worse than the 'guidance' they receive from human brokers.
As it turns out, many of the professionals have been using computers themselves. High frequency or algorithmic trading has become a major force driving the markets. Shares or bonds are held for fractions of a second as directed by powerful computer programs. The advantage for small investors is that if properly designed and programmed, such systems might eliminate some of the bias inherent in human advice. The harsh reality is that brokers, bank trust departments and other purveyors of financial wisdom often receive monetary incentives to push certain securities over others - whether that is the best route for the individual investor or not.
As the markets begin to revive, the best revenge for the small investor may be turn the power of technology to his or her own advantage. The key to the success of this effort will be assuring that the programming protocols driving the investment guidance has not been designed to favor any one option over another. The industry will work hard to counteract whatever co-evolutionary developments emerge, but they are accustomed to passive, rather than aggressive, behavior from their customers. In this environment, momentum and advantage must be taken when and where they are found. JL
Ari Levy reports in Bloomberg:
The dark truth about the financial services industry is that brokers such as those found at a big bank branch or a strip mall often receive a cut from mutual fund managers when they make a sale. Brokers tend to lean toward the funds offering higher commissions, regardless of their performance.
Simon Roy prefers computers to professional money managers because machines don’t work on commission.
That bias can result in a bad buy for the average Joe investor.
Jemstep aims to remove the bias with its money-management website, which lets retail investors import their retirement-account data and get automated advice, said Roy, the startup’s president. Jemstep offers free advice on asset allocation and will charge a flat monthly fee, starting at $18 per month, based on the size of the user’s retirement portfolio in exchange for suggestions about specific funds to buy and sell. Because Jemstep doesn’t play the fund-commission game, the Los Altos, California-based startup typically recommends inexpensive index funds, instead of the pricier mutual funds that brokers seem to love.
“The incentive structure under which brokers operate is designed to serve the interests of institutions, not the interest of investors,” said Roy, 51, in an interview. “Our advice is objective and untainted by any third-party influence.”
Jemstep began offering its automated portfolio manager to the public in January as a free service and has built up its membership to about 2,000 users, including employees at Google and EBay. For those managing less than $25,000 in retirement assets, the service will remain free. The price to manage larger portfolios can be as high as $70 per month, including portfolio analysis, tracking and rebalancing advice.
Backed by $10.5 million in private funding, Jemstep is among a growing class of startups aiming to tear down the traditional brokerage world by providing cheaper advice and more transparency. SigFig offers weekly suggestions for saving money and improving investment performance. FutureAdvisor, backed by Sequoia Capital, says it can help consumers save as much as 80 percent on fees by optimizing their portfolios.
Jemstep was founded in 2008 by Michael Blumenthal, a former stockbroker who is now the company’s co-chief executive officer. Jemstep has 20 employees split between the U.S. and Johannesburg, where Blumenthal is based.
The startup developed its recommendations by working with Windham Capital Management, a Boston-based firm with about $1 billion invested in stocks. The portfolio manager makes general suggestions, such as how much to allocate to international equities or when to lower exposure to U.S. stocks. The next step involves telling customers exactly which funds to dump and which to purchase.
“We’re trying to help people take action,” said Roy, referring to consumers’ tendencies to do nothing rather than seek out costly advice.
Considering Wall Street’s reputation lately, trusting a startup with our financial futures doesn’t sound so crazy.
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